Water management is big business in unconventional oil & gas fields.
Operators have to deal with the water and usually it ends up as an expense, they truck it off the lease or sometimes water pipelines connect to water treatment facilities where it is recycled or disposed of.
Today we talk about produced water and things to consider if you are approached to sell or lease your land for a saltwater disposal well. Generally speaking, what we are talking about applies to the surface rights associated with a tract of land. As with any agreement, it is important to consult with a qualified attorney who is familiar with oil and gas law in your jurisdiction. With that, this episode is for informational purposes only and should not be construed as legal advice.
If you would like some help in negotiating a Saltwater Disposal Well Agreement, my all-time favorite book on negotiating is Never Split the Difference by former FBI Hostage Negotiator, Chris Voss.
But as with any agreement that you would sign, it is important to consult with a qualified attorney who is familiar with oil and gas law in your jurisdiction. With that, this episode is for informational purposes only and should not be construed as legal advice.
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When we talk about saltwater, what we are referring to is the produced water or wastewater that is produced as a byproduct from oil and gas wells.
A saltwater disposal well or SWD for short, is a well that is drilled or converted for the purposes of injecting fluids, primarily produced water, underground.
To help you understand what is typically involved when a saltwater disposal facility is built, we’ll go through the typical facilities and equipment that might get installed on your land if you agree to a saltwater disposal agreement.
What types of facilities are installed with a SWD?
Pros
Cons
Terms may vary but some things you could try to negotiate for include:
Skim Oil is crude oil that is mixed in small amounts with the produced water. Oil and water is separated on the well pad but some oil still gets by. It needs to be removed before the water can be injected downhole, plus it is where a good amount of money is made with SWD’s.
To put it in perspective, on the conservative side skim oil to water ratio can be around 1%. If a SWD disposes of 200k bbls of saltwater per month, this would mean that it would generate around 2000 bbls of skim oil that would be sold per month. In many cases the skim ratio is 2-3 x that amount so for the same 200k bbls you could have 6,000 bbls of skim oil per month.
Royalties for the sale of skim oil are much lower than the landowner royalty you might get when leasing your minerals. With water disposal or skim oil “royalties”, they are typically well below 10%, usually on the order of 2-4% but you may be able to negotiate a higher amount. For comparison, the statutory minimum royalty in most states for oil and gas is 12.5%.
Like when you negotiate an oil and gas lease, there are certain factors that can impact how much bargaining power you have. With an oil and gas lease, if you are in an area with a lot of drilling activity that gives you more bargaining power, in other words, what is important is the location of your property relative to where the activity is. The closer the better. With oil and gas leasing, the size of your mineral interests also comes into play. You would have less bargaining power if you own 1 Net Mineral Acre vs. 100 Net Mineral Acres.
With a SWD lease, similarly, it boils down to location location location. If you are nearby an activity with a lot of oil & gas production and drilling activity, that is good. Also, the existing saltwater disposal capacity in the area plays into it as well. In terms of supply and demand, if there is a lot of demand for SWD wells but not much supply you have more negotiating power.
Plus, the amount of produced water the wells in your area generate will play into this equation. For example, in the Permian basin, produced water is a hot topic.
According to a study by Wood MacKenzie for the Wolfcamp formation in the Midland Basin, “An initial water-to-oil ratio of roughly 2:1 can increase to nearly 5:1 by year four and eventually reach 7:1. In the Delaware Basin, water-to-oil ratios are often twice as high as in the Midland Basin, and, in some cases, can reach as high as 10:1.”
With production around 4 million barrels per day, this mean that we are talking on the order of 20 million barrels of water produced, PER DAY. Now, in parts of the Permian, especially in New Mexico where water rights come at a premium, a lot of that water is recycled. But we still are talking about a lot of water that is injected underground in SWD’s.
Finally, some of the other things to consider with saltwater disposal well agreements is the quality of the operator. In this case, it is even more important to deal with a reputable operator that has a good record when it comes to health, safety, and environmental responsibility.
You can search your state’s oil and gas commission website for notices of violation and wellsite inspections to see what the company’s records are like in this area.
This excellent presentation talks about some of the testing requirements and how water injection rates are determined for saltwater disposal wells.
Thanks again – until next time!
August 29, 2019
July 21, 2023
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